Healthcare

As flu fears loom, will niche vaccine makers cash in?

H1N1 scare gives stocks a sharp boost, but companies face challenges

By

ValBrickates Kennedy

BOSTON (MarketWatch) -- Shares of niche makers of vaccines and anti-viral drugs have been on fire since the H1N1 flu first made headlines last month, but are these fledgling companies really in a position to cash in on a possible pandemic?

Certainly, the demand for better flu-fighting agents is real. Even if the H1N1 virus, or swine flu, fizzles over the summer, it's possible that it could re-emerge this fall bigger than before, just in time for flu season. Add to this an outbreak of the seasonal flu and the possible reappearance of the rarer, but far deadlier, avian-flu virus, and the situation could quickly take on the eerie undertones of a Michael Crichton novel.

"We dodged a bullet with swine flu this time," said Les Funtleyder, health-care strategist for Miller Tabak and Co. and author of "Health-care Investing." "But pandemic flu is inevitable."

Not surprisingly, investors have been quick to react to this doomsday scenario, bidding up shares of vaccine and anti-viral makers into the ozone.

In the lead for the vaccine developers is Novavax Inc.
NVAX, -4.63%
whose share price has mushroomed 125% over the past 30 days.

Also feeling the love are Crucell N.V.
CRXL
Dynavax Technologies Inc.
DVAX, +0.61%
and Generex Biotechnology Corp.
GNBT, +0.00%
with shares of each up 20% to 40% during that period.

Vical Inc.
VICL, -0.63%
was trading flat for the month before enjoying a 25% surge Thursday after claiming progress in developing a vaccine for H1N1.

Shares of anti-infective developers have likewise been bid up through the roof.

Hemispherx BioPharma
HEB, -2.29%
which is developing two immunity boosters, has seen its stock rocket about 275% over the past 30 days. Close behind is BioCryst Pharmaceuticals
BCRX, -5.03%
which has developed a new anti-viral agent, with shares up 100%. Crucell also has a product that could be used to treat flu.

A matter of time

Health officials and industry watchers concur that the need for better and faster vaccine production is becoming acute.

But the problem for any company working in the space is time. Current production techniques, which involve culturing vaccines in chicken eggs, are painfully slow, generally taking four to six months. And in the case of avian flu, they may also be unworkable, as the avian-flu virus can kill its egg hosts.

"They've always known that speed is important, but now, with the H1N1, they're getting another reminder," said Needham & Co. analyst Alan Carr, who tracks Vical and Crucell, in a recent interview.

Speedier production would also allow for companies to quickly shift production from one vaccine strain to another if a virus mutates, a major problem with current vaccine production.

Production capacity is another issue. Traditional egg-based vaccine production requires vast facilities, given all those eggs. As a result, there are relatively few flu vaccine plants on-line throughout the world, operated primarily by the world's largest vaccine makers, such as Sanofi-Aventis
SNY, +0.16%
GlaxoSmithKline PLC
GSK, -0.52%
and Novartis AG
NVS, -0.66%

Newer technologies could slash production time and allow vaccines to be created in smaller facilities.

So-called "cell-based" production techniques, which are already being used overseas by Novartis, can reportedly culture vaccines in about 15 weeks. Other technologies, such as DNA-based vaccines, hold the promise of getting the job done in as little as six weeks.

But whether these technologies can deliver remains to be seen, as most of the products are still in early-stage clinical testing.

"Many of these companies are red herrings," said Funtleyder. "But there's so much opportunity here, that if someone has a better mousetrap, they could succeed."

Need to show results

The current scare may give these small vaccine makers a chance to show their capabilities, but none are proven entities yet.

"They have a chance, but they have to show they can deliver," Funtleyder said. "None of them, to my knowledge, as of yet have been able to show in big Phase III studies that they've got the goods."

Funtleyder also cautions investors from assuming these companies would readily be able to cash in on a pandemic this fall.

"If you're not on the market yet, you're not in the game," Funtleyder said.

While the H1N1 flu has been shown to be vulnerable to the two leading anti-viral treatments -- Roche's
RHHBY, +0.21%
Tamiflu and GlaxoSmithKline's
GSK, -0.52%
Relenza -- that could turn on a dime as the bug mutates.

Indeed, one of the most troublesome characteristics of the avian, or H5N1, virus is that it appears to be impervious to Relenza and only somewhat susceptible to Tamiflu.

"There's market opportunity here. You're in good shape if you've got the goods," said Funtleyder. "But anti-infectives are also tricky. The odds are against you. Vaccines have a higher probability historically of succeeding, rather than anti-infective drugs."

It the younger vaccine makers are able to prove their technologies, they may becomes acquisition targets for Big Pharma. But analysts caution that most of these products are in mid-stage development.

"In general, Big Pharma likes early-stage platforms that they can outright acquire or larger companies that have a product already on the market, where the research is done and paid for," said Carr. "In the middle, you see more licensing, so they can share the risk."

Funtleyder agreed. "Big Pharma are concerned about their cash. They like something revenue-producing, especially in these times."

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